Breaking Down the Numbers: Lockout Edition

While I've read quite a bit of opinion pieces attacking the NHL and the players, few lockout related articles really break down the numbers to my satisfaction.  So I spent several hours digging around and crunching numbers and have at least a better understanding of the lockout and will try and break it down.

A quick summary of why there is an NHL lockout right now: Two billion dollars.  

That is the difference between the current NHL revenue share between the owners and players and the proposal by the NHL.  The NHL argues that they are losing money because NHL salaries are too high as the players get 57% of revenue.  The NBA and NFL recently moved to roughly an even 50-50 split, and the owners want to get at or below that number.

On the flip side, the NHLPA (players) took a pay cut and accepted a salary cap (reducing potential revenues) seven years ago, losing an entire season of hockey and pay in the process.  They realize they will have to sacrifice some revenue share, but they want to keep as much of it as possible and potentially avoid future lockouts.

So there were two proposals on the table before Saturday's lockout, regardless of what either side claims.  Let’s break these down and see what the differences are.

First, let's look at the current revenue share.  In 2005-06 the share was 54% of hockey revenue to the players and 46% to the owners.  This was put in place so they would share profits or losses depending on how the league fared.  Remember, in 2005 the NHL was off ESPN and off the radar in the United States with the Outdoor Life Network airing games.  It was not a good time.

Fortunately, the NHL has had steady growth since the last lockout.  Aside from teams generating more revenues, there was a big NBC TV deal, multiple Winter Classic profits, strong Canadian dollars compared to the US dollar, and the relocation of Atlanta to Winnipeg.  Here are the estimated revenues (using the salary cap) and the annual revenue growth:

2005-06: $1.96B
2006-07: $2.27B (15%)
2007-08: $2.56B (13%)
2008-09: $2.56B (0%)
2009-10: $2.71B (5%)
2010-11: $2.96B (10%)
2011-12: $3.27B (10%)

The NHL has had great revenue growth, so why the disagreement leading to lockout?  Well, revenues are not profits, and not all teams are profitable.  Revenues are all the money generated by the league, but there are costs in addition to the players’ salaries.  And larger salaries mean higher costs for small market teams which cannot afford to keep up.

The NHL salary floor (minimum spending on players) has $16M below the salary since the 2004-05 lockout.  That means in 2005-06, teams had to spend at least $23M on their players.  That’s not so bad for a small market team like the Islanders or the Predators.  But last year, they were required to spend at least $48.3M on their players, nearly double the amount in 2005-06.

And while revenues might have gone up for the league as a whole, they didn’t go up for every single NHL team.  The poorer teams have required some revenue sharing just to make ends meet, but even then it is difficult to keep up with teams like Toronto and Montreal who take in truckloads of cash annually and can afford to spend $16M more (two superstar players or several better players) while making profits instead of losses.

Back to the subject at hand, let’s look at what the players’ share of revenues has been since the lockout (roughly):

2005-06: $0.93B
2006-07: $1.08B
2007-08: $1.27B
2008-09: $1.46B
2009-10: $1.46B
2010-11: $1.54B
2011-12: $1.69B

Now we have a sense of what’s at stake: the players are rushing towards nearly $2B in salaries annually, and the NHL wants that number to back off quite a bit.  This would allow the smaller teams to afford to compete again as well as make some money for the owners (outside the scope of this article is that owners often make money, even if they record losses, with arena revenues, parking revenues, concessions, etc, and that often teams can be a tax write-off for the wealthy).

Before we dig into the proposals, let’s project salaries for the next five years.  That’s the rough number for each side’s proposal.  I will assume that revenues will either remain constant or increase somewhat because the NHL has yet to lose money.  So here would be salary expenditures for the next five years with different annual growth rates of 0% (flat), 4%, 7.1% (I’ll come back to this number), and 10%:

0% growth: $9.35B
4% growth: $10.53B
7% growth: $11.54B
10% growth: $12.56B

The 7.1% figure is important because it is the NHLPA’s proposed average annual growth prediction.  Since the last lockout, revenues have increased by an average of 11.1% annually.  If we take only the last five years, where there has been much lower growth, it's 5.5%.  The 7.1% figure is not overly conservative or aggressive, and it has been circulated in the media as a midpoint for projections.

Now, the NHL proposals.  Aside from the initial proposal made in June that dropped players’ revenue share from 57% to 43% while capping contracts and prolonging free agency, the latest proposal is a 49% share in year one, 48% in year two, and 47% in years three through five.  With the above growth rates, five-year salary expenditures would be:

0% growth: $7.86B
4% growth: $8.79B
7% growth: $9.62B
10% growth: $10.46B

Depending on the revenues, the players would be giving up $1.5-2 billion in salaries to the owners over the next five years.  Quite a bit of money, and that’s why we are seeing a lockout.

On the flip side, there is the NHLPA proposal.  This one is quite a bit different.  Unlike the previous CBA and the NHL's proposal, It mostly de-links salaries from revenues with a little exception in years 4 and 5.  The first three years are 2%, 4%, and 6% over current revenues respectively, and the fourth and fifth years would add 57% of growth in HRR for each of those years.

Depending on the NHL’s growth (or lack thereof), the player revenue share percentages are all over the map.  Using the 7.1% growth rate, the share would drop from 54.3% down to 52.4% over five years, an average of 52.7%.  But because share is not linked to revenues over the first few years, there could be a number of interesting scenarios:

0% growth = 62.2%
4% growth = 56.5%
7 growth = 52.7%
10% growth = 49.6%

It looks like it would benefit players (in terms of share) if there's no revenue growth!  But if we look at the total dollars in salaries paid over the five years:

0% growth = $10.20B
4% growth = $10.44B
7% growth = $10.67B
10% growth = $10.93B

Essentially what is happening is that salaries remain relatively flat over five years.  There's an element of cost (to the league, for the players it would be income) certainty with their proposal.  Obviously from a percentage standpoint it looks horrible if there's little to no growth, but from a historic average, and we'd likely see 5-10% annual growth, it's not bad at all.

Here’s the difference between the NHL and NHLPA proposals over five years:

0% growth = $2.39B
4% growth = $1.65B
7% growth = $1.05B
10% growth = $0.46B

So are the NHL and NHLPA miles apart on the core economics?  It depends on how serious Don Fehr is about an alternative revenue calculation.  While it's intriguing, I am not sure the NHLPA wants to lose several months of salary to blow up salary calculations and start over.

Instead, I am guessing it is a negotiation tactic.  Negotiation 101 says you start miles apart and ask for the moon.  The NHL definitely did this when proposing a 43% share for the players down from 57% ON TOP of a reduction in revenue calculations that would favor the league.  The players did the same thing when they said they would continue to play under the current (previous) CBA at 57%.

Common sense says they will probably meet in the middle at nearly a 50-50 split.  But there is no need for the players to have signed the last NHL proposal.  Again, negotiations are a game of chicken and neither side wants to blink.  NHL games were not scheduled to start for nearly a month, so spending 2-3 weeks posturing and playing up the PR, threatening to sign in Europe, etc are all expected.  In fact, I wouldn’t be surprised if there is no activity to meet in the next week or so.

But if the players take such a hard stance that they delay the season, they will ultimately lose no matter the agreement.  NHL revenues were roughly $2.73B last year.  If they eventually agree to a 50% split, that’s $1.64B at stake, nearly the difference between the last proposals at 4% growth.  Not only that, but another year of lost goals and points.  For older players like Teemu Selanne and Daniel Alfredsson, this could be their last chance to play in the NHL and bolster their point totals.  For guys like Sidney Crosby and Alex Ovechkin, this could be a potential 50 goal, 100 point season away from their Hall of Fame career numbers.

I am guessing that after a week of posturing, players will come back to the table with a more traditional deal and numbers much closer to that of the NHL’s offer, but will likely ask for concessions (such as contract length, Olympic involvement, and lower escrow payments).  I don’t think the first offer or two will result in a deal, but I would be very surprised if the lockout extends past October.  After 2005-06, I don’t think anyone wants a prolonged lockout.

2 comments:

  1. It's worth noting the specifics of what drove revenue growth over the last however many years, and why that leads to predictions of lesser growth (rather than assuming it will continue at the current rate). A large impact was felt from the NBC broadcast deal, which lasts for 10 years. That means we won't see another jump like that until that contract is up. Likewise, the mentioned Atlanta relocation was a one time event (which could be mirrored by a Phoenix to QC relocation which is plausible, but not necessarily going to occur). The rise in the Canadian dollar caused major increases in revenue, but will not continue. In fact, there is some significant risk of the currency sliding and having a negative effect upon revenues. There is one new potential positive, the HNIC contract is due in the next few years and could see a rise in revenue to a lesser degree than the NBC deal.

    All told, the 4% growth rate is by far the most reasonable of those listed as it's most likely growth will be less than it has been over the past five years (5.5%). The 10% growth rate is almost entirely out of the realm of reasonableness, and the 7.1% rate isn't much more realistic.

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  2. What the owners have yet to explain, or even admit to, is that they are holding up the bottom 5 or so teams as the sob sisters, without admitting that their proposals would *equally* increase the profitability of the Rangers, Habs, Flyers, Wings, and Leafs --those teams that are already doing just fine, thank-you-very-much.

    This is why the players keep harping on increased revenue sharing. To whatever degree "give backs" go towards the "Have" franchises, those franchises should have to plow those player give backs into revenue sharing for the bottom teams so that the players aren't having to contribute further to teams that are doing just fine without that. There's no reason to give new revenue from the players pockets to the Leafs!

    To me, the answer is obvious. Aim for 50-50 long-term. Lock in the salary cap at the current dollar figure, let revenues grow for several years which grows the owners share, go past 50-50 for a couple years until the owners get back what they "loaned" the players in the first couple years in transition (so that the contracts would not have to be rolled back), and then after that go forward at 50-50.

    That way every contract is honored as written, you still get to the long-term goal, and everybody goes back to playing NHL hockey.

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